To calculate the cost of bad hire (or the cost of good new hire), conventional wisdom says it is roughly $4,000 — this according to a 2016 survey by SHRM. This figure is consistent with Bersin by Deloitte’s 2014 data that looked at cost-per-hire across five industries, ranging from Healthcare ($3,033) to Manufacturing ($5,611). While these numbers have been steadily increasing, it’s easy for managers to see this simply as a “cost of doing business” as they build and optimize their teams. The reality is just the opposite. The true cost of bad hires is much higher – especially in sales.
The full cost of a bad hire for insides sales roles is in fact $400,000. $400,000? How is that possible? Well, it’s a factor of two things:
- How much time, money, and effort do you pour into that mis-hire before either you or he/she realizes you have irreconcilable differences and finally calls it quits?
- What is the difference in quota production between a top 20% producer and a bottom 20% producer?
Mis-hires cost more than just the recruiting team’s effort and the costs of interviewer time. Instead, the costs include new hire training, paying their salary for 3 to 6 months while you figure out if they’re going to make it, huge investments in coaching and remediation from your best managers, and – sometimes – severance costs. SHRM, LinkedIn, and others have run various calculations to estimate these costs and they range between 50% of annual compensation for hourly workers to 300% of annual compensation for senior executives. Payscale quotes 150% for line staff. Assuming annual compensation of $100,000, then the downside cost of a mis-hire is $150,000.
But what about quota? Top producers regularly achieve 150% of quota while bottom performers typically deliver only 50% of quota. So, not only are you carrying the training, salary, and other costs of a bad hire, you’re also missing out on the opportunity cost of a top or even an average performer. For a team with a $500,000 quota this means each low performer delivers $250,000 less than an average performer (and $500,000 less than a top performer).
Therefore, the true cost of a bad hire for inside sales roles is $150,000 in wasted costs and $250,000 in lower revenue. Together, that’s $400,000 – a full 100x higher than SHRM’s cost-per-hire figure of $4,000.
Does this calculation make you feel a little sick to your stomach? It should. The good news is that knowledge is power. Knowing the real cost of a bad hire should make it clear that the best way to hit your revenue goal is to hire smarter. So, how do you hire smarter?
- Develop a profile of what drives success on your team. The combination of previous experience, skills, and behaviors will vary based on size of your team, maturity of your product, type of customer, and complexity of sales. Use data, not intuition, wherever possible. There are companies, like Koru and others that can help do this in a validated, reliable way.
- Measure and capture the most important information on candidates and feed it into your screening and selection process. Gather this information as early in the hiring process as possible and make sure your recruiters and hiring managers know how to use it. You’ll likely need your current or new technology to do this seamlessly and not add more work to your team’s already full plates.
- Track hiring and performance over time to improve your top performer profile. Your profile will likely evolve over time so make sure to check the data at least once a year to see if your profile needs a tune-up.
The costs of bad hires are holding back your sales teams. Use this analysis to build a business case for investing in smarter hiring. Replace one bad $400,000 hire with a great hire and you’ll have paid for your efforts many times over.
Josh Jarrett is Chief Product Officer and Co-founder of Koru, the leader in predictive hiring based on what really drives performance. Josh has spent his whole career using data to drive business outcomes at organizations as diverse as McKinsey & Company, the National Park Service, and the Bill & Melinda Gates Foundation.